Following the recommendation, AstraZeneca has moved one step closer to FDA approval. Although the FDA is not required to follow the committee’s opinion, it generally does so.

The panel’s recommendation was based on data presented from the JUPITER (Justification for the Use of statins in Prevention: an Intervention Trial Evaluating Rosuvastatin) study conducted with 18,000 patients. It was observed that Crestor lowered deaths, heart attacks and strokes in middle-aged people (above 50 years) with normal cholesterol level having heart disease.

Crestor is one of AstraZeneca’s key drugs logging sales of about $3.6 billion last year. The FDA approval is likely to increase the targeted patient population which in turn should boost sales. Wider application means Crestor will be able to target about 6.5 million new patients who were not taking cholesterol lowering drugs. However, the future growth trajectory of Crestor may not be that smooth since Pfizer’s (PFE) Lipitor will lose patent exclusivity in 2011. This will increase competition in the cholesterol-lowering market with the entry of generics.

In addition, AstraZeneca is tied in litigation with seven generic drug companies including Mylan Laboratories (MYL), Sandoz, the generics arm of Novartis (NVS) and Apotex, among others who have challenged Crestor’s patent. The trial is likely to begin in Feb. 2010.

Today, we're fortunate to have Simon van Norden, Professor of Finance at HEC Montréal (École des Hautes Études Commerciales), continue as a guest contributor.

In my previous post, I wrote about some of the evidence linking serious banking crises to real estate market collapses. That evidence is far from iron clad; it is simply the observation that many banking crises in mature economies have their origins in a real estate boom and bust cycle. However, the idea is also intuitively appealing.

Remember that at the end of 2008, the Federal Reserve Board estimated that there was $12 Trillion of mortgage debt on residential properties in the US, with the Federal government and its agencies providing about 5% of the total, individuals 9% and the rest coming from the financial sector. The Case-Shiller composite index of housing prices has fallen 1/3 from its peak in 2006 and the latest the Mortgage Banker Association survey finds that 13.5% of residential mortgages in their survey are delinquent or in foreclosure.

Even if losses in the end are only 5% of mortgage debt, that's a $600 Billion drop in equity on private sector balance sheets. It's easy to see how losses of half a trillion dollars or more could push some banks into insolvency and many into illiquidity. That's the recipe for a banking crisis. Remember that the FDIC's Deposit Insurance Fund had reserves of just over $50 billion at the start of 2008 and of which approximately zero is left today. That's the recipe for a costly banking crisis.

Like heart disease, there may be many different significant risk factors for banking crises. However, the evidence to date suggests that real estate volatility is one of the most important, if not the most important. Reducing the risk of future crises (and their drain on the public treasury) requires that something be done to address this risk factor. As I'll discuss in a minute, there seem to be lots of ways to do this, but they boil down to some combination of (1) reducing the volatility of real estate prices, and (2) reducing banking sector exposure to real estate. But first, stop and think about the kinds of proposals that are currently under discussion. There's a long list that includes things like

• The creation of a new Consumer Financial Protection Agency, a National Bank Supervisor, and an Office of National Insurance, which would join with several other agencies in a Financial Services Oversight Council.
• Requiring reporting of all OTC derivative transactions, as well as clearing and transparent trading of all standardized OTC derivative products.
• Expanding the mandate of the Federal Reserve to explicitly include all firms that pose systemic risks to the financial system.
• Requiring registration of advisors to hedge funds and other pools of capital.
• A reform of executive pay in the financial sector to reduce incentives for excessive risk-taking
• The provision of explicit government insurance to mortgage derivatives
• A ban on "naked" short-selling
• Restricting the sale of CDSs and similar instruments to those with long position in the underlying asset.
• [your favorite goes here]

Now ask yourself which of these will be effective in reducing the volatility of real estate prices? Which will effectively reduce the banking sector's exposure to that volatility? With the exception of #6 on the above list, it's not obvious that any of these proposals will do either (and #6 doesn't appear to be high on the public agenda as far as I can tell.) Understand that the word "obvious" is an important caveat; for example, it's conceivable that improving clearing of OTC derivatives might reduce the exposure of the banking sector to real estate collapses by preventing contagion within the banking sector, but it's hard to know how much this will help. The same can be said for most of the items of the list; they might help or there might be other sound reasons for those reforms, but there is little that looks like it will reliably reduce volatility in the real estate market or reduce the banking sector's exposure to those fluctuations.

What I find most surprising about the financial reform debate is that so much of it has focused on reform of regulatory agencies, banking laws and trading environments while so little attention has been paid to reform of mortgage regulations and mortgage-related securities. So to stimulate the debate on such reforms, let me suggest two kinds of measures that deserve further consideration.

1. Highly-leveraged mortgages increase the systemic risk in the financial sector and should be discouraged. This could be done in a number of ways, such as a tax on high loan-to-value mortgages, or compulsory insurance, or via regulation limiting the value of liens that can be attached to real estate, or simply by limiting mortgage-interest deductibility. Doing so should reduce the banking system's exposure to the real estate market by ensuring that borrowers have greater equity investments (or are backed by insurance.) The reduction in leverage may also reduce real estate price swings.

2. The insurance of mortgages and mortgage-related products (including credit-default swaps on mortgage derivatives) requires tighter regulation. Such insurance is a critical buffer between downturns in the real estate market and the solvency of the banking system. While some mortgage risk is diversifiable, a substantial portion is a macroeconomic risk that is not diversifiable. This is particularly true for mortgage-backed securities, which pool risks across many individual mortgages. In the event of a national downturn in housing prices, it is not obvious that private-sector insurers will have the resources to honor their policies. At a minimum, the government needs to impose capital requirements for mortgage insurance and related financial derivatives that require a level of financial reserves commensurate with the degree of macroeconomic risk in this market. Others (such as Mehrling 2009) have argued that the government should simply provide such insurance themselves.

This post written by Simon van Norden.

Volcano's s5i is a component-based system that is incorporated directly into the catheterization lab, commonly known as the cath lab, thereby allowing intravascular ultrasound (IVUS) and fractional flow reserve (FFR) systems to remain always ON and ready. The company's IVUS and FFR systems are compatible with Siemens' Artis x-ray offerings.

The new agreement appears to be a win-win for both companies. Volcano's top-line will be substantially benefited by the agreement with the global giant. On the other hand, Siemens is a technology leader in the cath lab market focusing on a complete cath lab package. Siemens should benefit from the agreement as Volcano's s5i IVUS and FFR systems are a perfect match for Siemens' x-ray systems.

Volcano Corporation offers a broad suite of IVUS and functional measurement (FM) products, like the FFR systems, to enhance the diagnosis of vascular and structural heart disease, facilitates endovascular procedures, and guide optimal therapies. The company's IVUS product line can be directly integrated into virtually any modern cath lab.

Volcano's IVUS technology enables physicians to determine the stent size by visualizing vessel geometry and understanding plaque composition. The FFR technology enables them to make a physiological measurement of a lesion to evaluate the requirement for treatment. Both of these technologies are integrated into the cath lab in one system by using Volcano's s5i system.

Coronary artery disease is a common type of heart disease in which plaque buildup narrows the arteries and reduces blood flow to the heart. This can lead to chest pain or a heart attack.

XIENCE V is a drug coated stent that is used to treat CAD by propping open a narrowed or blocked artery and releasing the drug, everolimus, in a controlled manner over time so as to help prevent the artery from getting blocked again.

XIENCE V is currently available in the United States, Europe and other international markets. Shortly after its 2008 approval in the U.S., XIENCE V became the market-leading drug-eluting stent (DES) in the U.S. Clinical trial data has been very encouraging, which has resulted in a strong launch in the U.S. as well as overseas.

XIENCE V demonstrated superiority over Boston Scientific’s (BSX) TAXUS paclitaxel-eluting coronary stent system in the primary endpoints of two randomized, pivotal phase III studies.

The product has been taking significant share from its competitors, Boston Scientific’s Taxus and Johnson & Johnson’s (JNJ) Cypher (sirolimus-eluting system). Going forward, XIENCE V’s launch in Japan in early 2010 could potentially add another $500 million market opportunity.

Abbott is now a major player in the drug-eluting stent (DES) market with XIENCE V in its portfolio. The company is currently working on a next-generation drug coated stent called XIENCE PRIME. PRIME is on the market in Europe, and in a large-scale clinical program called SPIRIT PRIME in the U.S. If approved, PRIME could hit the U.S. market in the first half of 2012.

Abbott’s Vascular Products segment should continue posting robust growth mainly due to the strong performance of XIENCE V.

In our view, obesity remains the single largest opportunity for a new pharmaceutical product today. Roughly two-thirds of the U.S. population is overweight. The number is expected to grow to 75% by 2015. There is massive unmet medical need and clear pharmacoeconomic benefits to curtailing the problem.

According to the Journal of Health Affairs, obesity costs Americans $147 billion per year in total medical costs. This is 10% of all healthcare spending, and that number has doubled since 1998. It is likely to continue to surge in the years to come. Obesity is associated with an enormous number of co-morbidities, including high cholesterol, high blood pressure, heart disease, diabetes, joint and muscle pain, as well as depression and fibromyalgia. Studies have shown that reducing body weight by as little as 5% has a meaningful impact on reducing these co-morbidities.

New Products Are Coming...

Several biotechnology companies are working on the next wave of obesity candidates. These include Arena's (ARNA) Lorcaserin, Vivus' (VVUS) Qnexa, Orexigen's (OREX) Contrave and Amylin's (AMLN) pramlintide.

Contrave has completed phase III trials and Orexigen's management is expected to file for approval in early 2010. Qnexa is currently in two phase III programs with an NDA expected around the middle of 2010. Amylin's pramlintide and metreleptin is currently in phase IIb. That gives Arena, with an NDA planned before the end of the year, the first-mover advantage.

Safety Is Key Determinant...

Analysis for Contrave looks similar to lorcaserin in terms of efficacy. Both products offered around 17 - 18 lbs of weight loss after one year of treatment. Vivus' Qnexa, which is a combination of phentermine and topiramate, offered up around 20 lbs of weigh loss after only six months.

We are waiting for the Qnexa 1-year data, but it looks like Qnexa is the most efficacious drug. However, it is important to note that there is clearly more to a weight loss drug than just pure efficacy. If efficacy was the only hurdle, Wyeth's (WYE) Phen-Fen would still be on the market.

Physicians' surveys have clearly showed that safety is the paramount concern. And, with the significant prescriber interest in reducing co-morbidities, tolerability and abuse potential are also high on the list of what makes an overall effective drug for obese patients. Physicians will want to prescribe a drug that they feel has excellent safety and tolerability, with a very good chance in helping the patient lose at least 5% body weight. We are starting to feel more and more like that drug is lorcaserin.

What's Next For Arena?...

The biggest near-term catalyst for Arena is the release of the phase III BLOSSOM data in September 2009. From this program, we will look to confirm the efficacy and safety demonstrated in BLOOM, and finalize the NDA package. Data from the ongoing BLOOM-DM program will be filed as a supplement to the NDA in 2010.

There are several scenarios that could play out in 2010. We expect Arena to file for approval in December 2009, putting the FDA action date in October 2010. Depending on the time of the BLOOM-DM sNDA, the FDA will include the diabetes language in the label in October, approve the drug in October and review the -DM data separately, or delay approval in October while it reviews the full application.

The FDA has not met many PDUFA action dates for NCEs over the past few quarters. Plus, the agency has been very tough on new "neuro-physical" drugs for things like obesity, neuropathic pain and fibromyalgia in the past. So we believe the third scenario is the most likely, meaning a final lorcaserin approval will come in early 2011.

Data from BLOSSOM will most likely provide a small pop to the shares. However, the best chance for a meaningful run in the stock is through the signing of a commercialization partnership. We think this will take place around the middle of 2010 after all three firms -- Arena, Orexigen, and Vivus -- have filed for approval of their respective drugs and potential partners can evenly weight the aspects of each application.

We have said in the past, the best overall drug will secure the best partnership. For the meantime, we are maintaining our Neutral rating on Arena, but we believe there is clearly money to be made on obesity stocks over the next few quarters.

Obesity, coupled with the risk of heart disease and diabetes, proves to be the most expensive burden on a nation's healthcare. High cholesterol levels, which can damage the heart, has gained prominence as a serious problem. The most commonly prescribed medicines to control cholesterol are called statins.

Statins such as Pfizer's (PFE) Lipitor and AstraZeneca's (AZN) Crestor have become the best-selling drugs in the US, accounting for $17.5 billion in sales in 2008. Though almost all the drugs (except Crestor) have witnessed declining sales, it is mainly because of generic competition in the major markets of US and Europe.

Lipitor, the highest-selling drug in this category, will lose its patent in March 2010 (outside US and 2011 for US); Ranbaxy will enter the U.S. market on November 30, 2011. Lipitor is already facing tough competition from generic simvastatin (Zocor), as well as superior branded products, such as Crestor.

Another product, Trilipix (fenofibric acid [fibrate] from Abbott Labs (ABT)) was approved by the FDA in December 2008 to lower cholesterol levels. In some particular cases, a combination of fibrate along with statin is used as a treatment for controlling cholesterol.

We believe that with a more stressful lifestyle and food habits, the risk of heart disease is likely to increase further. Though, individually, many companies are losing market share, patent expiry will bring in more players, thus intensifying competition in a market where superior and cost effective products survive.

The World Health Organization (WHO) estimates the number of obese adults worldwide to grow from 400 million now to 700 million by 2015. The current recession could deepen the problem as rising prices of fruits, vegetables and other healthier foods, along with lower income, would force people to switch to less healthier options. In this scenario, controlling cholesterol is the strongest weapon towards healthy life.

The company plans to become the third largest player (from current seventh) in cancer medicine, which contributed about $2.5 billion of sales in 2008. At present, many of its products under clinical trial are for cancer treatment and six more will be added from the acquisition of Wyeth.

A number of factors such as high unmet need, favorable demographics, increased life expectancy and aging population are responsible for the renewed interest in this area. The anti-cancer drug market value is expected to grow to $85 billion in 2013 from $67 billion in 2008. Leading products for cancer therapy (fifth-largest therapeutic class globally) include MabThera/Rituxan, Herceptin and Avastin (of Roche).

Pfizer intends to exit the areas of heart disease, obesity and bone health in order to commit more resources to the treatment of oncology, pain, inflammation, diabetes, Alzheimer’s and schizophrenia.  These are the areas that the company believes where it will be able to take leading position. Wyeth also has some complementary products and research.

Pfizer has established a separate business unit focused specifically on oncology as management expects this area to offer significant opportunities for future growth.  The Oncology Business Unit has been established to expedite the launches of novel oncology agents and focus research efforts on cancers common in Asia.  While the business unit will have a global focus, they will have a significant interest in emerging markets as Pfizer believes this to be a region that has substantial unmet needs.

We have a Hold recommendation on the stock, based on our reservations whether Wyeth will provide the opportunity to grow revenue in the long-term, the significant reduction in the company’s net cash balance and the substantially lower-than-expected financial guidance for 2009.